Does India Need Mandatory Disclosure Rules?

Tax authorities across the globe face the challenge of lack of timely, comprehensive and appropriate information on potentially tax aggressive and tax abusive strategies, thereby rendering them helpless in curtailing such schemes.

Action 12 of the Action Plan on Base Erosion and Profit Shifting (BEPS Action Plan) released on October 5, 2015 seeks to introduce disclosure regimes to ensure early access of complete and relevant information on tax aggressive strategies with tax authorities so as to prevent implementation of such schemes. Amongst OECD countries, United Kingdom, Canada, United States, Portugal etc. already follow disclosure regimes for identification of tax planning, avoidance and tax abusive schemes.

In India, the domestic tax regime provides for an end to end reporting mechanism – beginning from financial statements, audit of expenses for tax computation, price determination and reporting of inter-group transactions etc. This is further supported by a robust tax administration wherein the revenue authorities verify information reported by tax payers.

An important aspect to note is that the existing reporting and tax administration structure is post-facto, wherein, a tax payer is required to report transactions at the end of the year. The tax administration also undertakes review once the reporting has been done.

The Indian tax administration provides pre-facto measures as well – such as Advance Rulings, Nil / Lower Withholding tax certification etc.; however, these are limited and constitute a minor portion of the existing tax administration framework.

Also, there is no prescribed reporting mechanism for potential tax planning transactions or tax aggressive schemes which would enable the tax administration to restrict implementation of such strategies. In this regard, the Government proposes to introduce the General Anti Avoidance Rules (GAAR) from April 1, 2018 in order to curb the tax avoidance strategies. However, while these rules are intended to make available comprehensive information to the revenue authorities, these also are post facto measures.

Therefore, the Indian tax reporting and administration environment is riddled by lack of timely and appropriate information on tax planning and tax aggressive strategies due to which the revenue authorities are unable to react swiftly to prevent implementation of such schemes.

In this regard, India is presently promoting the ‘Make in India’ campaign under which it is attracting foreign investors to invest in manufacturing activities in India. One of the main challenges to this campaign is the ease of doing business in India. Where India seeks to implement the mandatory disclosure regime, it is imperative to ensure that it is in sync with this campaign and does not impose any onerous compliance requirements on tax payers.

Further, reporting of schemes by companies under the mandatory disclosure regime, as tax planning or tax aggressive scheme may have commercial and reputational consequences. Accordingly, it is essential to sensitize the tax payers as well as the tax administration of these aspects in order to ensure that these issues are handled with maturity and does not have any negative impact on the business of the tax payer and on a macro level, on the Indian business environment.

Another issue that may arise is the trigger point of reporting. For instance, in the case of a transaction involving multiple jurisdictions, the role of the Indian entity or the third party facilitator may be limited, as a result of which it may not be aware of implications of the transactions. In such cases, the Indian party / facilitator should not be obligated to report under the mandatory disclosure regime.

In order to address these issues, it is essential that while notifying the mandatory disclosure rules, the Government should clearly prescribes the schemes which require reporting including the content of the schemes. This would remove ambiguity in relation to reporting and ensure ease of doing business, as the tax payers would not be burdened with unnecessary time consuming compliances. It should also be ensured that there is no overlapping between these provisions and the provisions of GAAR.

It is also essential that the Government clearly specifies the person responsible for reporting the schemes – i.e. whether the party seeking to implement such schemes or the third party facilitators and promoters such as tax and legal consultants etc. or both. It should be ensured that there is no duplicity of reporting.

Lastly, the trigger point of reporting should also be specified, such as thresholds, scenarios of reporting etc. It should also be ensured that the reporting should only trigger when the tax payer / facilitators have relevant information on the transaction.

The need of the hour is a mandatory disclosure regime formulated with the intent of mitigating litigation thereby saving the time and cost of both – tax payers and revenue, removing uncertainties in the tax environment and curbing tax revenue loss. In the meanwhile, genuine interests of tax payers need to be safeguarded by ensuring that excessive compliance burden is not placed on them.